October 1, 2017 2:04 am JST

The roots of Toshiba's governance problems run deep

Beholden to state policy, the industrial group couldn't make its own decisions on nuclear exports

ATSUSHI NAKAYAMA, Nikkei commentator

A pedestrian walks past Toshiba headquarters in Tokyo. (Photo by Shinya Sawai)

TOKYO -- Although Toshiba has finally reached a crucial deal to sell its prized memory chip business, the troubled Japanese conglomerate has a long way to go to emerge from its crisis. Two years have passed since a damaging accounting scandal surfaced at the famed manufacturer that once played a leading role in Japan's infrastructure development and home appliance industry. How did things come to this point?

Dysfunctional decision-making

During the negotiations on the sale of the memory business, Toshiba President Satoshi Tsunakawa frequently said "we cannot decide by ourselves alone." Many questions arose -- even whether it should even be sold in the first place. The company had too many parties to deal with, including the prime minister's office, supervisory authorities and banks.

The blame for Toshiba's plight starts with the reckless decision-making and negligence of successive previous presidents. But although these three former chiefs-- Atsutoshi Nishida, Norio Sasaki and Hisao Tanaka -- are gone, the group's governance remains dysfunctional.

The trio have faced lawsuits in Tokyo and three other district courts. But the accounting scandal they presided over -- in which Toshiba confessed to overstating profits by more than 230 billion yen ($2 billion) -- was only the beginning of its problems. Indeed, since the three executives retired, the company has been hit with over 1 trillion yen in losses related to Westinghouse Electric, its bankrupt former U.S. nuclear power subsidiary.

When Toshiba sells the memory unit, it will be left with few attractive businesses with which to resume growth. In addition, the Ministry of Economy, Trade and Industry has set up an office for dealing with Toshiba, and is likely to continue to exert influence on the company.

A book published 51 years ago, "Toshiba's Tragedy," contains a trenchant observation. In the early 1960s, Taizo Ishizaka, a leading figure in the business community who became Toshiba's chairman, butted heads with a president who had worked at the company his entire career. Conflict over personnel led to deteriorating earnings. According to the book, underlying the friction were "a restrictive, vertically divided organizational structure, faction-constrained management and a tendency to depend on the government." This situation remains largely unchanged.

Particularly vexing is the company's continued susceptibility to interference by banks, political and business circles and the bureaucracy -- a problem that stems from inadequate governance and a decision-making mechanism that allows government participation. 

For example, over half of Toshiba's sales still come from products and services for electric utilities, local governments and the Ministry of Defense. While the company manufactures power-related equipment, it is designed by METI as well as Tokyo Electric Power Co. Holdings, the operator of the ill-fated Fukushima Daiichi nuclear power plant. Perhaps nothing reflects this government-directed division of labor better than the 2006 acquisition of Westinghouse during Nishida's presidency.

The global financial crisis and the Fukushima meltdowns in March 2011 presented opportunities for Toshiba to change course. But the company instead maintained a policy of exporting nuclear reactors, unable to refuse the call of a government-backed "nuclear renaissance" that never materialized. Toshiba became an agency of state policy, while depending on government funds for restructuring unprofitable businesses such as liquid crystal display panels, and for overseas mergers and acquisitions.

Expanding rather than innovating

Japan's appliance and automobile industries used to drive its exports, but the country is now a net importer of most types of appliances. Nuclear reactors offered a seemingly attractive avenue for export growth. Toshiba's overseas operations became an extension of its exports rather than true globalization. Little surprise that it proved unable to govern overseas acquisitions, given that is has pursued only expansion and failed to failure to raise leaders of international caliber.

Twenty years ago, Yamaichi Securities -- one of Japan's big four brokerages at the time -- collapsed after trying to hide losses through off-balance-sheet transactions. This Lehman-like moment underscored the weakness of Japan's corporate governance, with management practices and managers that could pass muster only here. Toshiba's plight is evidence that these problems persist and shows Japan's inability to create growth industries -- unlike the U.S., which has capitalized on the information technology revolution.

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 13,032.96M
Shares: 4,237.60M

Tokyo Electric Power Co. Holdings, Inc.

Japan

Market(Ticker): TKS(9501)
Sector:
Industry:
Utilities
Electric Utilities
Market cap(USD): 6,704.56M
Shares: 1,607.01M

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